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First time accepted submitter stairmaster writes "A couple of months ago I came across an opportunity to supplement my income by doing some consulting work (read mobile app development) on the side. It appears that I will be doing this work for some time and my question for you is this: is it worth it to incorporate as a business? I know that the answer to this question is extremely dependent on circumstance but I'm interested in your experiences. Have you been in a similar situation, and if you have how did it work out for you?"

IANAL, but be advised there are procedures to get around that shielding (http://en.wikipedia.org/wiki/Piercing_the_corporate_veil). I ran a software consulting business as an S-corporation years ago and got strongly worded advice to be very careful not to mix personal and company funds, to use any corporation-purchased computers for work only, and not to claim a general use room in our home as a home office for deductions.

The computer one seems funny to me, as an example with corporate cars there's a standard personal use line for payroll taxes (including for an S-corp), I'd assume you'd just have to declare that a certain percentage of the PC use was personal and pay payroll taxes on that fraction of the depreciation schedule.

An acquaintance of mine is currently talking to the IRS/State/Local tax revenuers due to the notices they had sent going to the lawyer who set up the LLC, instead of her. The lawyer didn't notify anyone that the LLC was dissolved after two years of non-payment to the revenuers, 10+ years ago.

The lawyer saw my acquaintance just about every month since, so no "out of sight, out of mind" accident claims. This was a massive screw up on his part.

Precisely. It's a sham of a legal system the way it works but I've seen people get tons of loans for their "business" to pay themselves their salary/pay their bills/etc and then file bankruptcy under the business to disavow all of these loans without it ever harming their personal credit one bit. Limited liability, read: No liability. If you're making money in a position where you can legitimately claim a business, do it.

Honestly that is the creditors fault. If a lender lent money to a business with no credit history without having the owner(s) personally guarantee them (co-sign) then they can't be surprised by this outcome.

Precisely. It's a sham of a legal system the way it works but I've seen people get tons of loans for their "business" to pay themselves their salary/pay their bills/etc and then file bankruptcy under the business to disavow all of these loans without it ever harming their personal credit one bit. Limited liability, read: No liability. If you're making money in a position where you can legitimately claim a business, do it.

If other creditors of the corporation discover the fraud that was perpetrated, and they will, it won't bode well for the person who attempts to do what you describe.

NO! This is terrible advice. The attorney will cost you thousands of $ and steer you toward the most expensive option. This just isn't that complicated.

The choice is simple: If you expect to ever seek VC funding or have an IPO then form a Delaware C Corp. Otherwise form an S Corp in the state where you reside and/or do the majority of your business. There are plenty of websites where you can do this online for a few hundred bucks. I use www.businessfilings.com [businessfilings.com] for all my domestic corporations, but there are probably other sites just as good.

It's just not that complicated, so it wont cost many thousands from a decent attorney, unless you want a full corporate setup with consulting on how to set up the minutes, how to avoid piercing the corporate veil, and other issues. But for an LLC and some basic advice, it doesn't cost that much, and you'd get correct advice unlike what you are giving. There are enough complications and mistakes that people make doing it on their own to make it worth setting it up right the first time if the business has any

NO! This is terrible advice. The attorney will cost you thousands of $ and steer you toward the most expensive option. This just isn't that complicated.

User name explained: Bill has been Shanghai'd by an attorney in the past.

If you attorney is not small business friendly and does not comprehend your budget, you have hired the wrong attorney. Most will consult with you to determine what method of incorporation works best and then step back and let you do the legwork yourself to save costs. Doing this wrong can cost you far more than you save by cheaping out to start with.

NO! This is terrible advice. The attorney will cost you thousands of $ and steer you toward the most expensive option. This just isn't that complicated.

The choice is simple: If you expect to ever seek VC funding or have an IPO then form a Delaware C Corp. Otherwise form an S Corp in the state where you reside and/or do the majority of your business. There are plenty of websites where you can do this online for a few hundred bucks. I use www.businessfilings.com [businessfilings.com] for all my domestic corporations, but there are probably other sites just as good.

This is standard practice stuff for a lawyer, and any good law firm will be able to quote a flat price for setting up the business. I paid $500 for the lawyer, $110 for state filing fees, and $90 for the corporate book - for $700 total and following the practices required of an LLC I got an LLC in South Carolina. Different kinds of companies will require different filings, etc; so YMMV, but doing so through a good lawyer is the best thing you can do. And it will be well worth it in the long run, especially

That is an incorrect assumption. Being a shareholder does indemnify you from most lawsuits, but the board of directors can be personally liable as well as the corporate officers. If you are a small business as an s-corp, you will still be personally on the hook for most things. The only real protection that incorporation offers is liability from your investors. Investors have little to no recourse if you lose all their money. You are not shielded from other forms of liability, such as personal injury or negligence. You can still be sued directly along with the corporation you own, since you would be the presiding officer and CEO. Protection from creditors is mixed. While you may be protected from personal action if you stiff a supplier, the bank may require you to be personally responsible for any loan to your company as a condition of credit.

You should confer with an attorney before incorporating any business. The few hundred dollars in consultation fee is worth doing it right.

It's not so much about assets as it is about income. If your new business is making money and you have expenses you're much better off forming a corporation right from the start. Based on what my accountant (both past and present) have told me as well as my tax attorney, it's much easier to claim expenses when you have a valid legal entity for your company. Also, if something were to happen to your business, you want to have the liability protection that a corporation offers (you're still responsible for

From my experience, an LLC is used for partnerships. In some states, only certain professionals can even form LLC's. Often they are for protecting the partners from each other.. (ie, accountant partner screws up.. Lawsuit can hurt the partner, but they can't go after the assets of the other partners, if they were not involved)

Corporations are a way to shield owners (stock holders) from liability. (You can sue Bill Gates, when MS screws up, just because he's a stock-holder)

This is what is so wrong with the US. Corporations were originally granted limited liability for investors in return for limited rights. Now that the 14th amendment has granted "human rights" to "property" corporations have both limited liability and human rights giving them in fact more rights than humans. This is why Romney saying "corporations are people my friend" is so dangerous. If corporations want to petition government the executives can spend their considerable income to do it, the employees can spend their merger income to do it and the investors can liquidate some stock and spend their money to do it but the corporation itself petitioning government would be as abhorrent to the founders as tax free churches telling people how to vote.

This is what is so wrong with the US. Corporations were originally granted limited liability for investors in return for limited rights.

Corporations were not "granted" to anybody and certainly not in exchange for anything.

Corporate organization is done at the state level. Each state has different laws (though they typically have to accept 'foreign' entities, e.g. companies/corps from other states, if they want to do business in their state).

The federal government did not have some secret corporation power that it decided to bestow on people in exchange for something. States enabled people to form companies and corporations to further commer

Sure, but that was also before tort and the idea of 'full liability' were in place. Prior to the LLC, big businesses could shield their investors and owners but small businesses had a hard time doing so - the LLC was a way to equalize that protection.

Enough people with enough resources will always find a way to protect themselves. If you got rid of LLCs, that wouldn't change - but your average wannabe entrepreneur would have a lot harder time of things because he hasn't got access to all the lawyers and accountants you'd need to achieve limited liability without an easy legal avenue.

You don't have to know a lot about corporate law to realize why it makes sense. The most you risk when you change jobs is your new salary (in the event that your new job sucks, you get laid off, or your employer goes under). Entrepreneurs gamble a lot more to get off the ground (like savings or loans from family and friends) so their risk is already quite a lot higher -- enable their customers or investors to repossess their houses and cars and you'll just have fewer people starting businesses and cede more of the market to bigger corporations.

Sure, but that was also before tort and the idea of 'full liability' were in place.

Both tort and full liability existed long -- as in many centuries -- before corporate liability shields were created (in 1855); and even longer before the special corporate-like but tax-neutral-and-more-flexible-in-organization US LLCs were created (in 1977).

Prior to the LLC, big businesses could shield their investors and owners but small businesses had a hard time doing so - the LLC was a way to equalize that protection.

No, it isn't. The primary motivation for creating the was to create a low-ceremony (unlike a corporation), liability-shielded, flexible structure for members (often, themselves corporations rather than individuals) with the resources to craft their own management agreements rather than relying on the default rules applicable to corporations. Private corporations are a more common small-business structure, LLCs are more often big business structures (often, subsidiaries of or joint ventures between big corporations) than tools of small business.

You don't have to know a lot about corporate law to realize why it makes sense.

Knowing a lot about corporate law is probably detrimental to finding the argument you make sensible.

The most you risk when you change jobs is your new salary (in the event that your new job sucks, you get laid off, or your employer goes under).

This is false. In addition to reviewing the concept of opportunity cost, I suggest you consider the situation of the risks associated with workplace safety.

For the economy to grow we need people to take risks. Having a business requires you to put up a lot of risk. However if it fails (lets say you broke an Apple Pattent and got sued by them.) Your business and your effort would be tossed out, but your personal home and what not wouldn't be effected.

Be honest. Whether corporations are good or bad, people were running businesses way before limited liability was put in place.

Yes, but this is today...and you need to play things smart within the current system that exists!!

My advice....incorporate yourself immediately!!

First, as other mention, it limits liability for damage and creditors taking your personal possessions.

Second, this is about the ONLY way to keep more of your hard earned tax dollars. YOU can begin to write off all expenses, mileage (keep a logbook in your car to write odometer settings, easy documentation).

Also, and I'd recommend this...look into setting up a subchapter "S" corp. This will allow you to keep more of your money from being sucked up into SS and medicare taxes (employment taxation).

Get a CPA...to make sure you file correctly and on time. You figure out what you bill for the year, and out of that pay yourself (according to the IRS) a 'reasonable' salary. Out of that portion, you pay employment taxes...the rest falls through to personal income at EOY, and you only have to pay state/federal taxes on that.

Example...say you bill $100K a year. You could pay yourself a reasonable salary of $40K. So, you will have to pay SS and medicare on that $40K....along with state and federal (taken out of payroll like normal). But at EOY, you only have to pay state and federal on the remaining $60K. This can be significant.

Also, look into setting up a HSA (Health Savings Account) for yourself....and load it up pre-tax for routine medical spending. You can qualify to get one of these by signing up for a higher deductible insurance policy...for catastrophic only needs (used to be termed Major Medical).

Get with a bank and they will help you set up the HSA...this is not a use it or lose it...it grows annually, and if you want you can also invest some or all of this fund to make money for you. If it remains when you retire, you can convert this money to retirement funds. I found this was a great tool, and frankly, I wish the feds would promote this rather than try more and more to hinder it as it was done some with the recent Obama care bill.

That aside....yes, it is extra paper work, but once you get into the swing of it, not that difficult, when you start to see the $$ saving abilities it gives you. You do NOT have to cheat....this is legal, and available to you.

Get a CPA to work with (their fees are deductible too)...keep it legal and reasonable. Also, I'd recommend getting a copy of Quickbooks. This makes it easy to track your billing, income, outgo.....and at EOY, you can send it to your CPA to make it fairly quick and painless. If a good CPA that handles small businesses...they can help put you in contact with people in case you need liability insurance...one of my contract required I have this and I was put in touch with people that got me the min of what I needed and helped me do just enough to get set up and working.

I paid a lawyer about $250 years back and gave them a name. In 2 weeks, I had all the registrations and all I needed with the state and was a registered business. You can do it yourself....different difficulties in different states. Heck, look into the incorporating in Delaware like others do...not sure the exact benefits doing it there...but there are some.

Put a little thought and research into the start of it...and once you learn a few steps (quarterly filings with feds and state if over a certain amount for salary paid)...it becomes second nature.

It is a PITA that the govt does require so many hoops to jump through...yet they claim to want to make it easier on small businesses (large corps pay whole departments to do this fiscal stuff and permits, etc), but it can be done by the individual. And in the end, it is worth. it.

If for nothing else...to keep as much of your hard earned money as you can for yourself. It is worth it.

My advice: don't incorporate. The added burden of accounting and paperwork way outstrips the minor benefits of incorporation unless maybe you're making over about $50,000 per year.

First, as other mention, it limits liability for damage and creditors taking your personal possessions.

No, it really doesn't. If you're looking for protection against, say, a lawsuit for selling a defective product, then yes; or if you plan on buying parts on credit, and aren't sure you are going to be able to pay, sure, it's good protection. But you'd said you'd be doing consulting work. It's unlikely that you would encounter

Ever since the corporation was invented, it has had many "human rights": the right to hold property, the right to buy and sell, the right to form contracts, the right to sue and be sued, etc. The legal question is not whether corporations have any rights, nor whether they have all the rights of a natural person (no one asserts that) but what non-null subset of human rights they do have.

The key question regarding human rights, such as the right to free speech, is whether citizens must entirely surrender their right to free speech when they organize together under a corporate form.

The citizens need surrender nothing. They are free to spend their own money and say whatever they like. But the corporate money isn't theirs, it belongs to some legal entity which can own money. I don't see why a legal entity should have to have the s

By the same logic, if citizens carry personal responsibility when acting individually, why do those responsibilities disappear when they act collectively? Why can't we garnish wages of shareholders when a company goes bankrupt to pay of creditors or pay judgements?

IANAL, however, here in Oregon, at least, LLC stands for "Limited Liability Company", not "Corporation" (a common misconception, BTW). This is in some small way different from an LLP (Limited Liability Partnership). I have interests in both types of organization, but honestly let the lawyers determine what the best form of organization to create is/was. Also, corporations have two different forms, a "C-corp", which is evidently designed for large, publicly traded companies, and an "S-corp", which is a wa

I believe you're confusing LLC's with LLP's. LLC's are general purpose vehicles for just this sort of scenarios. LLP's are designed for the unique constraints of Architechture, Law, Medical and similar **licensed** professions; and as such, limit who can form. Straight "partnerships" on the other hand (meaning not LLP) can be formed without any paperwork at all, by simple agreeing to try to sell/make stuff with another person.

As AC above points out, you have to be careful with your LLC. In additional to no commingling assets, you have to be aware of the possibility that single-owner LLCs can be treated as Sole Proprietorships for purposes of litigation. If you are being sued and the judge decides that your LLC is in fact an SP, you have no liability protection at all.
Having at least one other contributing partner -- preferably not a spouse -- should keep that from biting you.

From my experience, an LLC is used for partnerships. In some states, only certain professionals can even form LLC's. Often they are for protecting the partners from each other.. (ie, accountant partner screws up.. Lawsuit can hurt the partner, but they can't go after the assets of the other partners, if they were not involved)

There's also an LLP (Limited Liability Partnership) which is slightly different [diffen.com] than a LLC.

LLCs, as such, are not partnerships (though, for federal tax purposes, an LLC with more than one member can be treated either as a partnership or a corporation and an LLC with exactly one member can be treated either as a corporation or a sole proprietorship.) LPs, LLPs, and LLLPs are partnerships.

In some states, only certain professionals can even form LLC's.

Its more common for a narrow range of businesses to be prohibited from being operated as LLCs than

Two main reasons to incorporate are liability and taxes. Liability probably isn't a big problem for you. Taxes come down to how much for how much. There are costs associated with incorporating, including your time, separate bank account, state and federal filings, etc. If you incorporate, do it because the tax savings clearly outweigh the costs.

Also, don't bother with a corporation (S or C). If you do this form an LLC. There are many advantages which you can google if you are really interested.

I did consulting for several years as a single member LLC. The paperwork/cost of getting setup was negligible and made contracting through various companies easy. There's a lot of contract gigs available, and you can get a larger percentage of the rate if you do them as 1099 instead of W2 contracts. That becomes important if any of the part time gigs end up becoming your primary source of income.

Whether your business is formed as an LLC or you are a sole proprietor shouldn't make a difference as to the issuance of a 1099 vs W2. Obviously, an LLC would receive a 1099, but unless your only client is the firm you are contracting with, then so should a bona-fide sole proprietor.

Two main reasons to incorporate are liability and taxes. Liability probably isn't a big problem for you. Taxes come down to how much for how much. There are costs associated with incorporating, including your time, separate bank account, state and federal filings, etc. If you incorporate, do it because the tax savings clearly outweigh the costs.

Also, don't bother with a corporation (S or C). If you do this form an LLC. There are many advantages which you can google if you are really interested.

Not bad advice, but the LLC vs. S-Corp decision partly depends on the state you're in. An LLC in New Jersey is $50/year and you can set it up online on a Sunday in an hour. In New York it requires publishing notices and can cost hundreds or more. Every state has their own LLC rules. The only Federal filing is a one-time EIN request. Otherwise it's usually just pass-through (disregarded entity) taxes that appear on your personal tax return each year for LLC.

This is correct but these are partly two different issues. If you set up an LLC you can elect to have it taxed as an S or a C corporation when you set it up. Which one you would want would depend heavily on your circumstances. Generally an LLC is more favorable now than either an S or C corp for this fexibility and ease of setting it up and reduced record keeping requirements, but LLC requirements and benefits vary quite a bit from state to state. Yes, you can form and LLC anywhere, Delaware for example for

It limits your personal liability. If you are doing consulting, there is always the possibility that you will err and have someone come after you. Better for them to come after your business than yourself personally and possibly lose your home and other belongings. (They still can but it does make it harder.) It is cheap and easy to incorporate and I can't think of many downsides other than trying to save the $50....

I'm an S-corp and there are huge benefits in tax write offs compared to filing as a 1099, but filing as an S-corp sucks, an you will need an accountant. I would go to an S-corp as soon as you think you are making enough to pay and accountant about $1k a year or are buying or spending good money on anything that could be considered work related, i.e. computers, cell phones, car expenses.You may just want to consult an accountant on the decision as they can tell you the exact benefits after looking at your situation.

S corp you have to pay yourself a salary, it's not as good as it looks on the surface. Just do an LLC, get general liability and you're good.

And you don't need an accountant to do an S Corp either. All the tax packages can do a 1120S for you pretty easily. However, you don't "start" as an S-Corp, you start as a C-Corp and have to file an S-Corp election with the IRS.

A salary is not the only way to take income in as an S-Corp. Yes, you do have to take a salary, and pay income and FICA, but you can also take profit distributions that don't have FICA. You can also pay your salary once a year to reduce the paperwork.

But compared to a 1099 there are way more filings. Federal, State, and Local for personal and business, for taxes, unemployment, FICA. Most are quarterly. So yea, I do know what I'm talking about.

Filing as an LLC is much easier depending on what US state you are in. LLC's were designed for this. I own several of them. I recommend filing in Delaware. It's very easy and you get charged a flat tax of $250 a year. If you do business in your own state you still have to pay state tax there but for me, I run an internet business and have no office or servers in my own state so one could argue I only need to pay taxes in Delaware.

There are two major benefits to incorporating as I see it, 1) it allows you to write off expenses against your earnings on your taxes 2) it allows you to protect your personal assets. Now, you could just file your taxes as a DBA with a schedule C without incorporating which would allow you to write off expenses without the corporation but without a corporation, if you get sued, they could come after your house, your car, your savings accounts. It's almost an insurance policy. That and it gives you a little more legitimacy with the IRS and other businesses.

To answer the original post: if you are making enough money to pay $250 a year in tax for a corporation, you should probably file for incorporation.

+1 for an LLC in DE. I am originally from DE so set up our company there but now live in elsewhere and still keep my DE LLC.

DE is just very easy to do business with. They're responsive and they're inexpensive. If your needs are simple then you don't need to go the extra step of being an S-Corporation (this may not be advisable for other reasons; that's a decision that you should have an accountant and/or a tax lawyer for). But your taxes won't change - you'll still do personal income taxes and a schedule C

I run an internet business and have no office or servers in my own state so one could argue I only need to pay taxes in Delaware.

Be careful with this. Some states are getting very aggressive in locating companies that need to register as a foreign LLC. If your LLC is in Delaware, but you and your partner(s) live in California, write code while sitting in your California apartments, use Internet service to California addresses for business, well, the state of California may consider you to be doing business

Make sure you look carefully at how you are going to move money from your customers through your corporation to yourself, or you will really quickly understand what "double taxation" means, and it ain't pretty. Get a really good CPA who specializes in taxes if you're going to start a corp or any kind of business.

An interesting area of tax law is how you handle assets that you take into the corporation.

Let's say you've have a great startup idea, and you've already bought a few laptops for yourself and your crew, a fileserver or two, RAID disks, network gear, dual WAN router, desk, chairs, and other capital expenses.

OK, now when you incorporate, you want to bring that stuff into the corporation, right? So, how is that handled? When the corporation gets stuff, it has to give something in return, right?

Seriously. I once hired a lawyer without hiring a lawyer first to ask if I should hire a lawyer. Big mistake. It was totally unnecessary. If only I had hired that lawyer he would have told me not to hire a lawyer and I would have saved a lot of money.

I've been running my own consulting gig via an LLC since 2006. It does have some advantages and is cheap to set up. (Cost me $125 filing fee with the secretary of state's office.) Two things I'd advise:

1. Talk to your insurance agent and buy an umbrella/general liability insurance policy. There's an "errors & omissions" kind of policy that might be perfect. But a general liability may suit you also (it's what I have). But you should definitely talk to the agent about it.

2. Talk to an attorney. Pay $75-$100 for a one-time consultation with an attorney and get their advice on what kind of business model suits you best. The LLC worked best for me. It may be right for you but I can't say. Maybe there are specific advantages to an S-Corp in your case. I don't know. But an attorney you pay to help you make the decision should.

You may also want to talk to an accountant about it. I skipped that part and many people I know in similar situations think I'm an idiot for doing so.

I've owned and maintained an LLC for about the last 3 years. I own 99% of it and 1% is controlled by my father. I did this so I could continue to maintain the protection that the LLC structure offers. In the event that I would ever get sued my personal assets should be shielded from the lawsuit. (Not that I plan to get sued but you can never be too careful).

I was able to incorporate in the State of Pennsylvania (where I live) for a filing fee of $125. I was also able to to register for an EIN with the IRS for free. From there I opened a bank account and got moving. I do limited consulting from time to time as well as manage a couple of servers for some folks. I keep everything totally separate. At the end of the year I work with a local accountant who charges me $125 to $200 to complete my LLC taxes with the State and the Fed.

There are some inherent benefits to having an LLC. I'm able to purchase business equipment such as laptops, computers, supplies, etc... with pre-tax money which lets my dollars go much further.

Additionally other businesses automatically seem to take me more seriously when I reach out to them for software, equipment, services or as a potential client.

If you are already tracking your spending it's honestly not a lot of work. You just have to keep track of your income and expense for your business. If you are small a spreadsheet and some folders for paperwork will work just fine.

The LLC structure has been extremely easy for me to manage and most months I don't even think about it. The only advice I have is avoid those "we incorporate you" websites. Chances are pretty good if you do a little bit of research you will be more then able to handle this yourself. Also reach out to the state that you are incorporating in, you'll be surprised at how helpful they can be with the process.

Having a corporation confers a lot of tax advantages. My first boss, 23 years ago now, was the owner of the business and he treated that thing like a piggy bank. Which, really, it was. If he could get away with the company owning a resource (like his cars) he'd do that. So a lot of his daily expenses were paid for by the company. That meant, among other things, he didn't pay income taxes on the income that paid for his cars. There are also tricks to structure at least some of your income to be taxed at a lower rate.

The down side is that it takes a lot of paperwork, a relationship with a lawyer and an accountant and your taxes get a lot more complicated. Also, the IRS is well aware that a corporation makes a good tax dodge, so you have to be careful to keep good records and not run afoul of them. And be able to prove to them that you're on the level when they come asking. They probably WILL come asking.

My first boss, 23 years ago now, was the owner of the business and he treated that thing like a piggy bank. Which, really, it was. If he could get away with the company owning a resource (like his cars) he'd do that. So a lot of his daily expenses were paid for by the company. That meant, among other things, he didn't pay income taxes on the income that paid for his cars.

Had a friend who did the same thing - then he got audited and as a result went bankrupt. You can "get away" with a lot, just don't get ca

When I asked my lawyer this question, his advice was that for a one-man shop, incorporating does not significantly affect your liability. If you are negligent, then they can come after you, whether or not you have incorporated. I know this differs from the word on the street. I made him say it several times, because it was not the answer I expected.
Where it makes a difference is if you have partners. If your partner is negligent, then a corporation or LLC can shield you.
BTW, he did not bill me for that consultation. There is really no excuse for asking a large group of non-lawyers instead of calling one on the phone for a few minutes.

24 people have posted before I did. They all had some input. From a US Legal perspective none of them adressed the real issue.

"When to incorporate?" -- When you need to.

The purpose of a corporation is to create an "entity" (some mistakenly call this "person") that is the true wage earner,whose assets are the only ones impacted by the acts of the corporation.

If you're a sole practitioner, and every dollar that comes in goes to you, a corporation will not shield your personal assets from anything.

For a sole practitioner to effectively use a corporation you'd need to- make sure the corporation collects all fees and pays all expenses related to the consulting work AND NOTHING ELSE- make sure the corporation 1099s you or W-2s you or in some way tax-wise indicates it pays you legal wages, not under-table money transfers- never comingle coporate resources and your own needs (in other words, no corporate paying your gasoline refill enroute to the customer or your lunch)...and finally... the expensive part...Have D&O E&O insurance.

If you're willing to go through all that, a corporation can shield your assets.

For one guy, far cheaper not to be a screwup and not get sued, and not mess with any of that.

The law is pretty clear. If it's a separate entity ("person") then it needs to be separate. If you keep it so, and keep it insured, it will protect you.

EP.S. All I've said is specific to United States corporation and contract law.

People mistakenly believe that incorporation is some sort of "magic wand" that reduces your tax liability and limits legal liability. Unless you meet the VERY STRICT rules for keeping the corporation at an appropriate "arms length" it does none of those things. (And it really doesn't do much for your tax liability even if you do incorporate.) Really, if you are just getting started on your own, insurance is a LOT less of a time sink than incorporation, and time is something any new entrepreneur does not have nearly enough of.

It is a difference wether you pay *once* taxes for $100,000 freelance income *or* pay in two chunks: tax for your $50,000 salary *and* tax fro the $50,000 earnings of your company (which has payed you $50,000 in wages).Bottom line that easy saves $15,000 if not more. See my other post where I emphasized on the effect it has when you let the company *sleep* a year.

I've had a couple businesses where I incorporated right off the bat. Ultimately, it was expensive and the overhead hurt my business. Like you, I am in a consulting business at the moment. Three months into it, I still have not registered the business.
I don't need the overhead, I don't need the liability protection, and I don't need to waste time right now filling out forms and keeping the State happy. I need to focus on keeping my customers happy and making money. If I manage to net $10K or more this

I do some freelance work in addition to my 8-5, and I will not consider forming a corporation or LLC any time soon. When I was contracting as a campaign employee, I considered doing so for tax reasons - however, it's easier to just file an "extra income" form (I had a W-4 on the campaign) and make sure you track your purchases. Between buying new software, a new computer, and other business-related expenses (and a little extra withholding from my real job) I don't pay much more in taxes than I normally woul

If you are working as a consultant, then the biggest advantage of incorporating will be in tax savings.

In Canada (Ontario specifically) there is a break-even point around $42k/yr income, where the personal income tax and corporate income tax (and accountant fees, etc.) you pay will be approximately equal. Above $42k/yr income, the corporate tax will become less and less compared to personal tax. This is due to the fact that the corporate tax rate is fixed at 16.5% (until $500k or $1M annual income... I can't recall) while personal tax rates have brackets that increase as you make more money.

To take an example from my past, the last year before I incorporated I made roughly $86,000 and paid about $22,000 in personal income taxes. The accountant that helped me incorporate did some calculating, and if I were incorporated, the corp would have had to pay only about $13,000-14,000 in taxes.

There are some costs associated with running a corporation. There are the initial costs of setting it up, usually between $2000-4000 for lawyers and accountants. Then annually, you will probably have an accountant prepare your corporate taxes, which will cost around $750-2000 depending on who does it and how organized your paperwork is. These are extra hassles that some people find unpalatable, and it is a bit of extra administrative work on your part, but altogether, it saves you thousands and is very much worth it. (Unless you have some kind of ADHD and psychologically cannot deal with paperwork.)

Another tax saving tool available in Canada is that you can make $50k/yr in dividend income, tax free. Therefore, if you and your significant other are both part owners in your newly formed corp, then you can essentially have a combined household (personal) income of $100k/yr, tax free because your corp will pay out dividends to its owners, rather than salary (which is all taxable). You will probably not make exactly $100k/yr tax free (but it will still be around $95k or $98k) because in order to take advantage of various tax credits you have to show some personal income. How this is works is that, whenever you need money from your corp, you just withdraw it. At the end of your fiscal year, you and your accountant will figure out how to label those withdrawals, be it dividends, salary, whatever, to maximize the tax savings. That is how I have been doing it in Canada, anyway, and your accountant will be more familiar with how this stuff works in your area.

The best thing you can do (aside from asking the experts on Slashdot, of course) is to go see an accountant who deals with corporate stuff. Explain to him or her what you are thinking about doing and outline your current situation. Using your 2011 net income as an example, they can then draw up a spreadsheet for you, showing what would be your taxes and other numbers if you had been incorporated in 2011. This will let you know with little uncertainty what is your best course of action.

There are other benefits that come with having a corporation, your corp can purchase the equipment (e.g. laptops, mobile devices for testing, etc.) that you will use to do the service that the corporation sells. This can be recorded as an expense of the corp, which reduces the corporate taxes. In contrast if you bought equipment personally, it would not affect your tax situation at all. This is nice if you like toys, and would like some extra reasons to rationalize their purchase.

In summary, if you plan to make more than $42k (*) this year from your moon-lighting activities, just get it done already.

* $42k, or whatever is the break-even number for the tax system you live in.

2) You are consistently making $100,000/year or more net, and are in a state where the cost of maintaining a corporation is not burdensome. I'm not going to give legal advice here, consult a CPA and find out how at that level an S corp can save you money on taxes.

You will get many people telling you to incorporate in order to limit your personal liability and protect your assets. That is mostly bullshit--when you are a 1-person corporation it is extremely easy for someone whom yo

up to $2K to incorporate, and up to $2K in accountants fees annually. But that's about it (in Canada). It's a bit of a nuisance in that you've got to spend about 5 hours annually with simple paperwork and phone calls and keeping government records up to date when you move.

So the answer is simple. When you can write-off $10K annually, you'll save yourself the $2K in taxes alone. Between home offices, client meals, car allowances and more, it's all very quickly worthwhile.

certainly $2K is high. but between the accountant, and the corporate lawyer (to cover the meeting books, the shares, the partnership docs, various NDAs, and the occasional contract), and being in a big city, even my tiny $200'000 service-based single-man company winds up spending $2K quite easily. It's not 3, but it's definitely more than 1.

In Canada at least, for a revenue stream of $100,000, the small business tax rate is about half the personal tax rate. So if you think that you could perchance use $15,000 or so yourself, instead of giving it to the tax man, then you should incorporate. If however, you think that the federal government will put your money to better use, then don't.

I was a consultant for 9 years. When I set up initially, I had two options: Let the company that contracted me pay me on a W2, handle the taxes, and take a cut for their trouble, or incorporate and let them pay me corp-to-corp.

Many companies will not pay a contractor on a 1099, which is how you pay someone for services if they're not an employee. There are too many potential IRS headaches if the contractor doesn't handle things properly on his e

Before that I workd as "freelancer". That ment a year with a high income led to high taxes. A year with no income had no benefit (well, payed no taxes ofc...)

Now with my incorporation, the company works as a buffer, safing taxes in the long run.

I'm now no longer "freelancer" but "self employed". My company pays me small wages. So after wages, pension funds and internet/phone bills, the rest teh company makes is profit and taxed. (But to a significantly lower tax rate than above).

From that wages I pay income taxes (in your case you had likely two times wages, once from your original employer and in addition now from your own company).

However: if your company stops app development for a year, and continues paying you, it makes a loss in that year (on top of paying no taxes ofc). That loss, even from several years, is carried into the next year. Your personal taxes from your double income are not affected ofc.

The incentive to incorporate is lessened if you plan on spending all of the cash generated by the business. For then you would have to report all of the income at graduated personal income tax rates.

If you plan to leave cash in the business and not use it personally right away, then incorporating makes much more sense. Here, the amount of combined personal + corporate taxes in the near term would be smaller. The time value of money in the delay of paying taxes works in your favour. What might the business d

It depends on a few factors such as the laws and regulations of your state, how much income you're making, etc. It's probably a good idea to hire a CPA. A good CPA can show you the tax advantages to incorporating and help you set up your corporation. In my state, it only costs $10 to start up a corporation, and I was able to outsource the payroll (even if you're the only employee, you're still paying yourself) to a company who would handle all the state and federal taxes and filings for about $60/month (

Scenario: I incorporate in the Caymans or Hong Kong or somewhere where ownership information doesn't have to be disclosed to the USA. My bank account and web site are there too. The corporation "hires" me, but otherwise keeps any profit. I pay income tax on my declared income, but have access to the corporation's funds via credit card.

There is more involved than choosing the type of business format to operate under. Corporations add asset protections for their shareholders, that is true, but only if you actually keep everything separate. Many an individual has been surprised that they are legally liable even though they formed an LLC, Corp S or even a Corp C. Not only do you need to form the corporation, you need to operate it as a separate entity. You cannot commingle assets, so you need separate bank accounts from your personal acc

I recommend incorporation for the tax advantages, not for the lawsuit liability protection. From what I've read, and what my CPA has told me, a lawsuit can make your personal assets just as vulnerable in a single person corporation as they are in a sole prop. The difference is that it's *possible* to make contracts between your corporation and others, rather than you personally. But just because it's possible doesn't mean it's likely -- until you build up some significant business credit rating (e.g. a good

Disclaimer: I am not an attorney or tax professional. Use this information at your own risk.

I incorporated in Missouri a couple years ago as an S-Corporation. There are more drawbacks than benefits in my case, so I'm dissolving it. The biggest drawback is the paperwork. It's so easy to let it slide in order to have time for family and getting actual work done. Then it's very easy to get behind on the paperwork. Then it's very easy to find a letter from the IRS saying they're charging you penalty and i

This is pretty much exactly what I did, once I figured out my accountant was making me pay two different (supposedly mutually-exclusive) taxes on the same income. You do need to keep an eye on them and make sure they know what you and they are doing.

He charged me something like $800 a year to prepare corp and personal taxes too.

There's a bit more to this state-corporation tax thing than meets the eye. I incorporated in NJ to simplify my bookeeping, but NJ has a law that taxes S-corps at the same rate as C-corps. That's a higher rate than personal income, even though all of the S-corp income goes to the shareholder (me).

The NJ state corporate tax return is a nightmare to do properly, and you always end up paying more than you think you should. NJ also has a minimum $500 corporate tax annually, so even if your corp made NOTHING,